In attempting to reform the U.S. health care system, President Barack Obama and congressional leaders have repeatedly said that controlling costs is as important, if not more, than extending coverage to all Americans.

To do so will mean turning around a decade of political will — under both Democratic and Republican control — to the contrary.

Over the past decade, Congress did little to close exceptions in physician self-referral laws and anti-kickback statutes, laws originally intended to completely bar doctors from referring patients for services in which they had a financial interest.

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"Critics of self-referral arrangements state that they pose a conflict-of-interest since the physician is in a position to benefit financially from the referral," social legislation specialist Jennifer O'Sullivan explained in a Congressional Research Service report in 2004. "They suggest that such arrangements may encourage overutilization of services, which in turn drives up health care costs. They also contend that such arrangements create a captive referral system, which limits competition among health care providers.

"Others respond to these concerns by stating that while problems may exist, they are not widespread. Further, these observers contend that in many cases physician investors are responding to a demonstrated need which would not otherwise be met, particularly in a medically underserved area."

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Health care researchers continually say that exceptions in the law are driving excessive and often unnecessary spending.

While the Obama administration has visibly pursued outright medical fraud and abuse enforcement this year, it really falls to Congress to sew up these loopholes. Most observers say legislators are unlikely to close many of the exceptions they created in 2001 through legislation known as Stark II, named after Rep. Pete Stark, a California Democrat who led the charge for prohibitions on self-referral in legislation — Stark I — that took effect in 1992.

Similar "safe harbors" came in 1987 and additionally throughout the 1990s to protect those in the health care industry from anti-kickback laws Congress first passed in 1972.

Rather than eliminating self-referrals, the exceptions have allowed a system to flourish in which physicians in some states now own almost everything, said Jean Mitchell, economist and professor at Georgetown University Public Policy Institute, who's written extensively on the effects of self-referral loopholes.

Mitchell singled out Texas, California and Florida as the most problematic states. "Texas just passed a law mandating coverage for cardiac CT scans," she said. "There's no proof it does anything to improve health or diagnosis. It's just another way for cardiologists to make money."

Seeing Imaging Clearly
One exception to the Stark law is called the In-Office Ancillary Exception, which encouraged doctors in group practices to buy imaging equipment and perform scans on patients in their own office. (See the appendix here for a fuller list of exceptions.) Physician-owned imaging had already started to flourish, but this new exception, billed as an improvement in patient care, increased the trend. Medical device companies, such as GE Healthcare and Siemens Healthcare, capitalized amid rampant growth.

"This in-office loophole was meant to address the Mayo Clinics of the world, not the orthopedic surgeon with five physicians practicing together who put an MRI machine in their office," Mitchell said. "I can't even tell you how easy the money is. If somebody told you that you could make another half a million dollars a year by putting a CT scanner in your office, of course you would do it."

Doctors say owning the imaging equipment offers convenience to patients and prompt diagnosis that results in better care. And procedures in a doctor's office are typically less expensive per case.

According to a June report by the Medicare Payment Advisory Commission, or MedPAC, the volume of diagnostic imaging services paid under Medicare's physician fee schedule between 2002 and 2007 grew by 44 percent, above the 23 percent growth per beneficiary for all other physician services.

From 2000 through 2006, Medicare spending for physician imaging services doubled from about $7 billion to about $14 billion, the General Accounting Office reported last year. Ironically, just below this report on the GAO Web site is a 1994 report identifying the same problem, saying physician-owned imaging warrants scrutiny.

Mitchell and colleagues attempted to analyze the problem among commercial insurers in a 2007 paper published in Health Affairs. They reviewed claims data submitted in 2004 to a large insurer in California and found that 33 percent of providers who submitted bills for magnetic resonance imaging scans were classified as self-referral.

In addition, the study determined, "61 percent of those who billed for MRI and 64 percent of those who billed for CT did not own the imaging equipment. Rather, they were involved in lease or payment-per-scan referral arrangements that might violate federal and state laws."

"Imaging is probably the worst because it's just so easy to send a patient for another test," Mitchell said.

Doctor Entrepreneur
Another problematic loophole is called the Whole Hospital Exception. Under the original Stark law, physicians could not refer patients to any facility in which they had a financial interest. But exceptions under Stark II allowed doctors to refer patients to outpatient-oriented "ambulatory surgery centers" they owned or physician-owned hospitals in which they were part owners of the entire hospital. A similar "safe harbor" exists under the anti-kickback statute.

Throughout the past decade, several moratoriums on referrals to specialty hospitals of more than a year each, took place, which has slowed the growth in physician-owned hospitals.

By and large, these exceptions have led to a surge in physician-owned specialty hospitals (roughly 150 nationwide) and surgery centers (more than 5,000) along with the market for medical devices. These specialty facilities focus on procedures that tend to make the most money — such as imaging, cancer treatment or minor surgery — and often do not include emergency services or general medicine.

According to an article in the journal Health Services Research, urologists who owned ambulatory surgery centers in Florida performed twice as many kidney stone surgeries as non-owners. They also performed a greater proportion of their surgeries (39.6 percent) in ASCs, than non-owners (8 percent). The study analyzed patients undergoing outpatient surgery for urinary stone disease in Florida from 1998 to 2002.

The procedure to remove a kidney stone — called lithotripsy — is largely elective, generally covered by insurers and can be lucrative, said lead author Dr. John Hollingsworth, a clinical lecturer in urology at University of Michigan Health System. "By virtue of it being an elective procedure the timing of it is up to physicians to decide," he said.

Surgery centers, he says, are major drivers of the health care dollar. And there are some important advantages. Doctors have obvious reasons for using them: For patients, they are more convenient and often easier, and for payers, the cost per case at surgery centers is less expensive than hospitals. The question is: Are the procedures needed?

Attempts to close the whole-hospital exception often get muddled by lobbying between physician groups and hospitals. Surgery centers present a major financial threat to hospitals; a ban on physician self-referral was again part of the American Hospital Association's latest proposed health reforms this year.

"It's mostly a political issue right now. It's who has the stronger lobby, and that's all it's about," said Dr. Bhagwan Satiani, a professor at the Department of Surgery, Division of Vascular Disease and Surgery at Ohio State University School of Medicine, who has analyzed the political dynamic.

"If you look at the evidence, it's kind of mixed. Both sides are not telling the entire truth. I have arguments against and for specialty hospitals. Congress responds to money and who has more influence."

Chris Meyers, an attorney for Holland & Knight, which represents healthcare providers, pharmaceutical companies and device makers, believes the exceptions are useful and proper. "Without the exceptions, every marketing activity would be a violation of anti-kickback and self-referral," Meyers said.

From Meyers' perspective, multiple federal laws combined with various state laws can make for a confusing web of possible legal trouble. More than half of all states have laws that cover alleged kickbacks through private insurance. Federal laws cover Medicare and other federal programs.

"I expect to see significant increase in attention paid to conflict of interest, kickback and self-referral," Meyers said. "I think the tendency is to go a little bit overboard. The pendulum has swung a little too far (on the side of too much regulation). It makes it difficult for companies to understand what the rules are and what they are supposed to do."

Mitchell, at Georgetown University, has an easy solution. "The only way to get rid of the whole problem is to just tell physicians you can't own anything," she said. "You cannot. That's it. Bottom line. It's a conflict of interest." The AMA, which wrestled with the issue in the early 1990s, disagrees: As long as patients are informed of the referring physician's financial interest and about alternative facilities, it sees self-referrals as ethical.

Barring complete prohibition, Mitchell suggests reducing and bundling the payment rate for such things that fall within one of the exceptions or safe harbors. In addition, Medicare and commercial insurers should stop paying for procedures and start focusing payments on overall care.

"What that would do is take the incentive out of running the scanner for everybody who walks through the door," she said.

It's something most politicians and insurers understand in theory, she said, but maybe not as much in practicality because insurance companies and government health plans are scared to death of the doctors. "The provider might drop out of the network, limit choice, and then the patients will be screaming," Mitchell said. "Therefore they've done relatively nothing."